Proprietary trading firms have become increasingly popular over the last few years, with retail traders all looking to increase their trading capital and become funded traders.
This begs the question, are prop firms good for beginners? The short answer is yes, prop firms are great for beginner traders to learn risk management, discipline and grow their trading capital.
So, let’s find out more…
Prop Firms - Are They Good for Beginners?
Prop firms are often thought of by new traders as something that is only reserved for traders with a huge amount of experience and years under their belts. The reality is, this isn’t true!
The barrier of entry to becoming a funded forex trader is lower than ever and this is providing a huge amount of opportunities for traders, both new and experienced.
In fact, there are more benefits of prop firm trading for newbie traders and beginners, due to the strict risk management and discipline that is pushed upon you by the rules set out by prop firms.
The Benefits of Prop Firm Trading For Beginners
So, what are the benefits of prop firm trading for newbie traders?
Teaches Risk Management
All prop firms have rules that limit traders with respect to losses, drawdown, risk and trading performance. This forces traders to learn and consider risk management in their trading strategy - something that most traders do not consider when trading their own capital.
Limits Potential Losses
When traders are trading their own capital, there are no drawdown rules or limits - meaning an inexperienced trader can easily blow through their whole account in just weeks. With prop firms, your losses are limited to just the money you spend on the prop firm challenge - meaning you cannot get into a position whereby you lose your whole trading account.
Education
Prop firms usually provide education resources and materials for traders to upskill in their craft and further develop themselves.
Access To Higher Levels of Capital
The majority of newbie traders are coming into the industry with a few thousand dollars. With conservative risk management, it’s not possible to earn a considerable income with this money. Therefore, prop firms allow traders to have access to much larger volumes of capital than they would be able to deposit - increasing their potential earnings if profitable.
Avoid Getting Scammed By B-Book Brokers
Newbie traders struggle to differentiate a reputable trading broker from a scam trading broker, of which there are many! By using a reputable prop firm, you can avoid the risk of being scammed by one of these unreputable brokers, whilst still finding your feet in the industry.
The Drawbacks of Prop Firm Trading for Beginners
Although there are a huge amount of benefits, you must also be aware of the potential drawbacks for new traders looking to trade with a prop firm:
Traders Can Lose Their Funded Accounts
If traders violate the rules, for example, maximum drawdown, they will lose access to the funded trading account. This would mean a trader looking to be funded again would need to pay for another trading challenge. Obviously, this can prove costly if you are not a profitable trader and lose many accounts.
It May Be Challenging to Hit the Profit Targets
If you’re an inexperienced trader, it can be hard to hit the profit targets required by the prop firm. However, firms like The5Ers do not have a maximum timeframe, meaning you can take your time and focus on good quality trades - without the stress of trying to get funded in 20 days.
It May Be Stressful
New traders might find trading a prop firm account more stressful and emotionally challenging. Although, I would say that it should be less stressful as it’s not all of your money on the line, as it would be if you were just trading a brokerage account!
What Should You Check Before Starting to Trade With A Prop Firm?
Although prop firms are clearly very beneficial for newbie traders, you should still check a number of factors before you jump in and decide to pay for a trading account challenge!
Firstly, you should understand the rules set out by the prop firm as some prop firms will be better suited for you than others. It’s easy to violate the rules and lose your trading account if you don’t fully understand them - so ensure you take time to sit down and familiarize yourself with the rules of engagement.
Secondly, you should have a trading strategy in place. Prop firm trading will be very stressful if you don’t have a trading strategy figured out. We’d recommend taking your time to research, backtest and build a trading strategy before you pay for your trading account challenge.
These two steps may take a little while but they’re very worth doing prior to becoming a funded trader!
Tips To Trade with Prop Firms
Although trading with prop firms is a great idea - it’s not always easy! Here are some tips for trading with a prop firm…
Risk Management
Ensure you brush up on the risk management rules offered by the prop firm you’re looking at working with. Once you understand the rules, you can set your risk per trade at an appropriate level for the prop firm - meaning you stand a good chance at managing your risk properly and not violating any rules!
Price Of Challenge
Ensure you shop around and take a look at the price of the challenge account too. Some prop firms are charging extremely steep prices for prop firm challenges, whilst the offering is no better than some other firms!
Trading Plan
Make sure that you put a solid trading plan in place, with as many rules as you can - to avoid subjectivity. You want the trading plan to be easy to follow and allow you to focus on just executing the trades, rather than stressing about whether a trade fits your strategy or not.
Reliable Prop Firms for Beginners
Whether a beginner or experienced, it’s crucial to work with a reputable prop firm.
Forex Prop Firms -
The5Ers
The5ers is one of the most reputable prop firms in the industry, with over 1600 reviews on Trustpilot, up to $4,000,000 in real trading capital for traders and one of the most complete offerings in the market for traders!
Out of the numerous offerings, the best option for newbie traders will be the Bootcamp program. The bootcamp program is extremely cheap and offers traders the opportunity to start on a lower amount of funded capital, whilst scaling up to a much larger amount in a relatively short time frame.
Stock Prop Firms -
TradeThePool
Trade The Pool is the most reputable stock trading prop firm in the industry, with over 12,000 stocks, ETF’s and penny stocks to trade. They’re a relatively new firm but have a great reputation and are leading the way for stock trading prop firms!
Futures Prop Firms -
TopStep
TopStep is the most reputable Futures trading prop firm in the world, offering traders funded capital to trade the Futures markets. TopStep have a glowing reputation and have long been known in the industry as the best prop firm for traders that use NinjaTrader to trade Futures.
Alongside capital, they offer some educational materials for traders looking to upskill and take their trading to the next level.
In Summary - Are Prop Firms a Good Idea For Beginner Traders?
In conclusion, prop firms are a great option for beginner traders looking to grow their skillset and reduce their potential risk in the markets.
Prop firms force risk management and discipline upon newbie traders, whilst giving them the potential to increase their capital under management.
If you’re looking to become a funded trader, work with The5Ers now!
